The Principles for Responsible Investment (PRI) has released two legal opinions stating that following a recent change to the Employee Retirement Income Security Act (ERISA), private US pension plans are free to respect environmental, social and governance (ESG) factors when investing. The opinions were written by Morgan, Lewis & Bockius LLP (MLB) and the Groom Law Group.
Enacted in 1974, ERISA sets minimum standards for pension and health schemes in the US private sector. One key issue is the definition of a scheme’s fiduciary duty.
In 2008 the US Department of Labor (DOL) put up a major barrier to ESG integration by rewriting the ERISA statute. As a result, the law declared that a pension scheme’s “consideration of non-economic factors (like ESG) should be rare, and when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.” This had the effect of discouraging pension schemes from integrating ESG. But last October, DOL removed the barrier via another change to ERISA.The law now states that ESG integration is not at odds with a pension scheme’s fiduciary duty.
For the law firm MLB, this means that if a scheme “determines that an investment is appropriate based solely on economic considerations, including those that may arise from ESG factors, it may make the investment without the need to treat the investment as in need of special scrutiny.” According to MLB, the revised statute also no longer treats ESG factors as “merely collateral considerations,” but rather as “proper components” of a fiduciary’s analysis of an investment.
Groom believes that the new ERISA will prompt more US pension plans to consider ESG factors when investing. Groom says: “Plan fiduciaries must still follow a well-reasoned process to determine whether to invest or divest and may wish to review and consider revising their current investment policy” with respect to ESG.
Added PRI Managing Director Fiona Reynolds: “We hope this document will assist investors with legal advice on how to integrate ESG factors in their day-to-day investment processes.”